FW: RHB FIC Credit Markets Monthly Review - 7/12/17

 

 

 

 

7 December 2017

 

Credit Market Monthly Review

November 2017

 

MYR Surged Past 4.10/USD; BNM Hints at Tightening in 2018

 

Market Review

¨   MYR Credit Market: Global trends dominate as the MGS bull flattened; MYR advanced past 4.10/USD.  As expected, BNM left OPR unchanged at 3% suggesting improving macro conditions. With BNM hinting that it may consider reviewing the current degree of monetary accommodation given the strength of global and domestic macroeconomic conditions, expectations have started to embed themselves into bond yield pricing. The MYR strengthened significantly versus USD to trade at a year-high primarily contributed by steady economic performance which saw 3Q17 real GDP growth accelerating well above the forecasted level. This was also supported by improving Brent crude oil prices given the decision to curb oil production beyond Mar-18 by OPEC and non-OPEC members. On MoM basis, the 10y MGS returned to the 3.90% level (-1bp) whereas the 3y MGS rallied strongly which saw yields dropping to 3.40% (-5bps). The Malaysian bond market saw returns increase in November with the TR BPAM All Bond Idx returning 0.40% MoM (vs KLCI Total Return: -0.15%)..

¨   APAC USD Credit Market: US Treasuries on the rise ahead of FOMC meeting; flattening of the UST yield curve in November. FOMC left monetary policy unchanged fuelling higher expectations of a rate hike with the Fed futures implied rate hike in Dec 17 at 98.3% at the end of Nov; The US House of Representatives released its Tax Reform Bill; Asian IG CDS via the iTraxx AxJ IG plummet to a new lows of 73.2bps; AxJ IG credit spreads fell sharply, outperforming the HY bond yields.

                                             

Outlook

¨   Looking towards the end of the year, the US is again expected to focus the attention of the market. While the versions of the tax reform bills by the US Senate and US House of Representatives have been passed, the final version is anticipated by the end of the year, as it enters into the reconciliation stage. A boost to the economy is expected to ensue in 2018, which has been one of the drivers of the upward shifts in US yields. While this occurs, policy continuity is expected in the US Fed with no expected impediment to the election of Jerome Powell to the post of Chairperson of the US Fed. Expectations of a December Fed hike still remains in the market, with Fed Fund futures implied expectations currently at 98.3% especially with members of the Fed FOMC still supporting this hawkish view. The UST yield curve on the other hand continued to bear flatten, and the 2y-10y UST spread ended the month tighter with a 63bps spread. In the short term, the US funding appropriation bill is expected to cause consternation in the market as it comes to fore. Though investors expect a timely resolution to the issue, grandstanding by the US President or members of the Democratic party are still outlier risks not to be ignored. We had previously called for defensiveness on the Asia Pacific USD space, favouring IG issuances over HY, where we see limited room for further strong performances. We are reaffirming our views to underweight duration for the USD credit space as we hit the year end. For Malaysia however, as we have previously signalled, strong pipeline issuances have been unleashed onto the bond market, with supply still expected especially in the AA space and unrated names. As we see the MGS curve rally over the month of Nov, we would move towards a more neutral or underweight in duration, especially in light of the recent BNM Statement which suggest rate tightening in 2018. We would continue to monitor latest developments in terms of foreign ownership of the MYR government bonds and the recent rally in the MYR.

 

Table 1: Index Movements

Indices	30-Nov	Changes (bps)
		1M		1M
iTraxx AxJ 5y IG	73.2	-2	73.2	-2
AxJ IG Spread (bps)	164.0	-15	164.0	-15
AxJ HY (%)	6.73	9	6.73	9
UST 2y	1.78	18	1.78	18
UST 5y	2.14	12	2.14	12
UST 10y	2.41	3	2.41	3
SOR 2y (%)	1.50	5	1.50	5
SOR 5y (%)	1.88	0	1.88	0
SOR 10y (%)	2.29	-7	2.29	-7
MGS 3y (%)	3.40	-5	3.40	-5
MGS 5y (%)	3.62	-5	3.62	-5
MGS 7y (%)	3.90	-4	3.90	-4
MGS 10y (%)	3.91	-1	3.91	-1
AAA 5y Spread* (bps)	73	8	73	8
AAA 10y Spread* (bps)	81	6	81	6
AA 5y Spread* (bps)	104	7	104	7
AA 10y Spread* (bps)	115	6	115	6

Source: Bloomberg, BNM, RHBFIC        *MYR-denominated bonds

 

 

 

 

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